ESG Activism

ESG activism refers to individuals and organizations that advocate for Environmental, Social, and Corporate Governance (ESG) criteria as part of evaluating business operations. ESG considerations can be employed as a basis for investment or divestment in a corporation or fund, and in activism targeting those corporations or funds. This political activism has led to growing criticism of the ESG movement, with critics arguing that the movement harms financial returns and that it coerces individuals who participate in pooled investments like mutual funds to support political positions against their will.

Environmental factors relate to the company’s policies on, and interactions with, issues that affect the natural environment. ESG activity in this area often supports environmentalist activism on pollution, climate change, conventional energy, the use of pesticides or genetically modified organisms (GMOs), and the extraction or use of raw materials.

Social factors broadly concern the corporation’s interactions with other, sometimes external, interests. Issues can include employee and labor relations, human and animal rights, certain forms of workplace diversity, and even the products or services that the company provides.

Governance factors typically focus on the corporation’s structure and operation, and can include issues such as executive compensation, board member demographic diversity, political spending or lobbying, and management structure and policies.

Support and Criticism

Environmental, Social, and Corporate Governance activists seek to identify and influence businesses based on the ESG standards valued by the activist.

Advocates for the use of ESG criteria in corporate operations and evaluation often argue that modern companies should consider—and advance—interests other than those of their shareholders when making business decisions. They favor a broad definition of corporate “stakeholders” that includes not only employees, suppliers, and customers, but the entire community, society, and environment in which the corporation operates or causes impact.

Chairman and CEO of BlackRock Larry Fink is among the most prominent endorsers of this broad conception of “stakeholder,” who wrote in his 2020 Letter to CEOs that companies must commit to “serving all stakeholders – your shareholders, customers, employees, and the communities where you operate,” in order to advance a goal of “achieving a more sustainable and inclusive capitalism.”

Investors and activists can take different approaches in applying ESG criteria. Investors who seek to align their investments with their personal values may utilize ESG factors when selecting investments. Activists go further, using ESG standards to put pressure on a business, sometimes even advocating for divestment of specific holdings based on value judgements. When activists are also themselves investors, they may put forth shareholder resolutions that seek to change a business’s behavior to align with ESG standards.

Critics of ESG activism contend that it unnecessarily politicizes corporations and seeks to compel companies to wade into controversial or divisive issues that are more properly addressed (if at all) by voters and government. They also argue that utilizing businesses to effect social change can create a conflict of interest for management between maximizing shareholder returns and pursuing non-economic ESG objectives, some of which could be directly harmful to future financial returns.

This can become especially problematic at the institutional investor level—such as in a pension or mutual fund—where corporate stock is held by the fund for the financial benefit of others. In such cases, fund investors or pension beneficiaries who do not support ESG issues—especially at the potential expense of diminished investment returns—might nevertheless remain exposed to them through their pooled investment vehicles. This, opponents contend, spreads ESG-related investment risk and politicized activism among those who may have little or no say in their investments.

ESG activism has also led some state governments to re-evaluate their business relationship with certain financial institutions. In 2022, several states including West Virginia, Louisiana, and Texas began restricting public sector investments or contracts with banks that were heavily involved in promoting ESG, including BlackRock.

Many organizations engage in ESG-related corporate advocacy, and some specialize in it.